Depreciation increases by 10 with a 40% tax rate; cash flow from operations changes by what amount?

Unlock all questions

This demo includes only 20 questions. Upgrade to access hundreds of questions, flashcards, exam simulations, and disable ads.

Full question bankExam simulationsFlashcards
From $24.99Unlock all

Enhance your accounting skills for the PSIA Accounting Exam. Use flashcards and multiple-choice questions to prepare effectively with hints and explanations. Get set for your exam success!

Multiple Choice

Depreciation increases by 10 with a 40% tax rate; cash flow from operations changes by what amount?

Explanation:
The key idea is that depreciation is a non-cash expense, but it still affects cash flow through taxes and the indirect-method adjustment. If depreciation rises by 10, pretax income falls by 10. With a 40% tax rate, taxes decrease by 0.40 × 10 = 4, so net income falls by 10 − 4 = 6. For cash flow from operations using the indirect method, you add back the full depreciation as a non-cash charge (+10). The net effect on CFO is the change in net income plus the back-added depreciation: (−6) + 10 = +4. So cash flow from operations increases by 4.

The key idea is that depreciation is a non-cash expense, but it still affects cash flow through taxes and the indirect-method adjustment. If depreciation rises by 10, pretax income falls by 10. With a 40% tax rate, taxes decrease by 0.40 × 10 = 4, so net income falls by 10 − 4 = 6. For cash flow from operations using the indirect method, you add back the full depreciation as a non-cash charge (+10). The net effect on CFO is the change in net income plus the back-added depreciation: (−6) + 10 = +4. So cash flow from operations increases by 4.

More Multiple Choice Questions
Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy